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Fiat Money: Who Cares About Deficit

GeoLaureate8
Posts: 12,252
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12/16/2010 7:36:22 PM
Posted: 5 years ago
Is the government deficit really something we should be worrying about when happen to live under a system of fiat currency?
"We must raise the standard of the Old, free, decentralized, and strictly limited Republic."
-- Murray Rothbard

"The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended."
-- Frederic Bastiat
Ragnar_Rahl
Posts: 19,297
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12/16/2010 7:46:18 PM
Posted: 5 years ago
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing-- which makes fewer goods, which means the government has to inflate even more to get the same share of those goods tomorrow, which makes even fewer goods... That's the sort of thing economic collapses are made of. So pick your poison.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
GeoLaureate8
Posts: 12,252
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12/16/2010 7:52:13 PM
Posted: 5 years ago
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

which makes fewer goods

Why's that?
"We must raise the standard of the Old, free, decentralized, and strictly limited Republic."
-- Murray Rothbard

"The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended."
-- Frederic Bastiat
darkkermit
Posts: 11,204
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12/16/2010 7:59:05 PM
Posted: 5 years ago
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?


Now i can only buy stuff with trident gum
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Ragnar_Rahl
Posts: 19,297
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12/16/2010 8:29:28 PM
Posted: 5 years ago
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

It's not nothing in purchasing power.


which makes fewer goods

Why's that?

Entrepreneurs discouraged (and businessmen encouraged to retire= who is going to produce?
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
J.Kenyon
Posts: 4,194
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12/16/2010 11:05:10 PM
Posted: 5 years ago
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

Like Ragnar said, it's not nothing in terms of purchasing power. "Nothing" brings to mind visions of Zimbabwe and the Weimar Republic where you needed a wheelbarrow full of money to buy a loaf of bread. If we continue to irresponsibly inflate the way we currently are, China will stop buying our debt and sell off the bonds they currently hold, which will put the dollar on the fast track to becoming a piece of green paper more useful as kindling than as a unit of exchange.
GeoLaureate8
Posts: 12,252
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12/16/2010 11:16:23 PM
Posted: 5 years ago
At 12/16/2010 11:05:10 PM, J.Kenyon wrote:
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

Like Ragnar said, it's not nothing in terms of purchasing power.

Yes, but why does it's purchasing power diminish if more fiat currency is printed?

For example: The grocery store is selling a loaf of bread for $3.00. You have $3.00 in your hand and you can purchase that loaf of bread for $3.00. So if the government prints out more money the next day, the bread is still $3.00, your income is still the same, then how has the purchasing power in any way decreased?? The only thing that might happen would be that the grocery store increases the price of bread, but why should it be necessary to increase the price of bread just because more money was printed and put into circulation?
"We must raise the standard of the Old, free, decentralized, and strictly limited Republic."
-- Murray Rothbard

"The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended."
-- Frederic Bastiat
J.Kenyon
Posts: 4,194
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12/16/2010 11:20:20 PM
Posted: 5 years ago
At 12/16/2010 11:16:23 PM, GeoLaureate8 wrote:
At 12/16/2010 11:05:10 PM, J.Kenyon wrote:
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

Like Ragnar said, it's not nothing in terms of purchasing power.

Yes, but why does it's purchasing power diminish if more fiat currency is printed?

For example: The grocery store is selling a loaf of bread for $3.00. You have $3.00 in your hand and you can purchase that loaf of bread for $3.00. So if the government prints out more money the next day, the bread is still $3.00, your income is still the same, then how has the purchasing power in any way decreased?? The only thing that might happen would be that the grocery store increases the price of bread, but why should it be necessary to increase the price of bread just because more money was printed and put into circulation?

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).
Ragnar_Rahl
Posts: 19,297
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12/16/2010 11:33:07 PM
Posted: 5 years ago
At 12/16/2010 11:16:23 PM, GeoLaureate8 wrote:
At 12/16/2010 11:05:10 PM, J.Kenyon wrote:
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

Like Ragnar said, it's not nothing in terms of purchasing power.

Yes, but why does it's purchasing power diminish if more fiat currency is printed?
Entrepreneurs creating goods sell them for cash, which they store for some time before buying other goods. If they know that that amount of dollars is worthless tomorrow, they can't sell goods and survive. If they can't sell, they can't produce. If they can't produce, you need to print more to buy whatever's left, but that means even less is left.


For example: The grocery store is selling a loaf of bread for $3.00. You have $3.00 in your hand and you can purchase that loaf of bread for $3.00. So if the government prints out more money the next day, the bread is still $3.00, your income is still the same, then how has the purchasing power in any way decreased?? The only thing that might happen would be that the grocery store increases the price of bread, but why should it be necessary to increase the price of bread just because more money was printed and put into circulation?
The money was printed to satisfy the demands of the government for bread. Bread gone. Less bread, higher price. If the government doesn't want to take goods out of the picture, it has no need to print money, if it was producing value equivalent to the bread, it has no need to print money for it can trade.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
belle
Posts: 4,113
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12/17/2010 1:13:50 AM
Posted: 5 years ago
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

sure inherently, but so is everytihng. the fact that individuals value it is what makes the modern economy possible. if our debt gets large enough confidence in the currency will fall and its usefulness will fail. then you can kiss foreign investment goodbye, along with the wheelbarrows of money to buy a loaf of bread problem already mentioned. it makes us all poorer by depreciating our savings.
evidently i only come to ddo to avoid doing homework...
darkkermit
Posts: 11,204
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12/17/2010 2:11:42 AM
Posted: 5 years ago
At 12/16/2010 11:20:20 PM, J.Kenyon wrote:

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).

Question that has been bugging for for the longest time, how does demand increase? For most good and services, the demand and supply curve are determined by price and quantity. However, how does one determine the "price" of money. It doesn't make sense.
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djsherin
Posts: 343
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12/17/2010 2:35:26 AM
Posted: 5 years ago
At 12/17/2010 2:11:42 AM, darkkermit wrote:
At 12/16/2010 11:20:20 PM, J.Kenyon wrote:

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).

Question that has been bugging for for the longest time, how does demand increase? For most good and services, the demand and supply curve are determined by price and quantity. However, how does one determine the "price" of money. It doesn't make sense.

The price or purchasing power of money, strictly speaking, can only be measured against specific goods. So money has a different purchasing power (price) for apples, computers, cars, glasses, etc.

The purchasing power of money or the price of money goes up in industries like electronics and computers. These goods are are constantly getting cheaper which means money is gaining purchasing power against them (the price of these goods in terms of money is going down, the price of money in terms of these goods is going up).

On the other hand, things like food and chairs, and many other goods constantly get more expensive, meaning money is losing purchasing power against them (the price of these goods in terms of money is going up; the price of money in terms of these goods is going down).

It's possible for money, at the same time, to be losing purchasing power against some goods while gaining against others.

The general purchasing power (which is the inverse of the "price level" e.g. the CPI) is an attempt to measure the value of money against all goods. This can have certain uses, but it can also be highly misleading; it doesn't exist outside the its individual components (which would be the numerous goods money exchanges against). There are many many problems with trying to measure the price level or the general purchasing power of money, but that's a different topic.

Theoretically, the supply and demand graph for money would have the general purchasing power of money on the y-axis and the quantity of money on the x-axis. The supply curve would represent the supply schedule for money and the demand curve would represent the demand schedule. An increase in demand would lead to a higher purchasing power of money (a higher general price for money, a lower price level in the economy). An increase in supply would lead to a a lower purchasing power of money (a lower general price of money, a higher price level for the economy).
darkkermit
Posts: 11,204
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12/17/2010 3:15:22 AM
Posted: 5 years ago
At 12/17/2010 2:35:26 AM, djsherin wrote:
At 12/17/2010 2:11:42 AM, darkkermit wrote:
At 12/16/2010 11:20:20 PM, J.Kenyon wrote:

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).

Question that has been bugging for for the longest time, how does demand increase? For most good and services, the demand and supply curve are determined by price and quantity. However, how does one determine the "price" of money. It doesn't make sense.

The price or purchasing power of money, strictly speaking, can only be measured against specific goods. So money has a different purchasing power (price) for apples, computers, cars, glasses, etc.

The purchasing power of money or the price of money goes up in industries like electronics and computers. These goods are are constantly getting cheaper which means money is gaining purchasing power against them (the price of these goods in terms of money is going down, the price of money in terms of these goods is going up).

On the other hand, things like food and chairs, and many other goods constantly get more expensive, meaning money is losing purchasing power against them (the price of these goods in terms of money is going up; the price of money in terms of these goods is going down).

It's possible for money, at the same time, to be losing purchasing power against some goods while gaining against others.

The general purchasing power (which is the inverse of the "price level" e.g. the CPI) is an attempt to measure the value of money against all goods. This can have certain uses, but it can also be highly misleading; it doesn't exist outside the its individual components (which would be the numerous goods money exchanges against). There are many many problems with trying to measure the price level or the general purchasing power of money, but that's a different topic.

Theoretically, the supply and demand graph for money would have the general purchasing power of money on the y-axis and the quantity of money on the x-axis. The supply curve would represent the supply schedule for money and the demand curve would represent the demand schedule. An increase in demand would lead to a higher purchasing power of money (a higher general price for money, a lower price level in the economy). An increase in supply would lead to a a lower purchasing power of money (a lower general price of money, a higher price level for the economy).

Thank you for that very informative and detailed explanation.
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djsherin
Posts: 343
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12/17/2010 4:52:23 AM
Posted: 5 years ago
At 12/17/2010 3:15:22 AM, darkkermit wrote:
At 12/17/2010 2:35:26 AM, djsherin wrote:
At 12/17/2010 2:11:42 AM, darkkermit wrote:
At 12/16/2010 11:20:20 PM, J.Kenyon wrote:

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).

Question that has been bugging for for the longest time, how does demand increase? For most good and services, the demand and supply curve are determined by price and quantity. However, how does one determine the "price" of money. It doesn't make sense.

The price or purchasing power of money, strictly speaking, can only be measured against specific goods. So money has a different purchasing power (price) for apples, computers, cars, glasses, etc.

The purchasing power of money or the price of money goes up in industries like electronics and computers. These goods are are constantly getting cheaper which means money is gaining purchasing power against them (the price of these goods in terms of money is going down, the price of money in terms of these goods is going up).

On the other hand, things like food and chairs, and many other goods constantly get more expensive, meaning money is losing purchasing power against them (the price of these goods in terms of money is going up; the price of money in terms of these goods is going down).

It's possible for money, at the same time, to be losing purchasing power against some goods while gaining against others.

The general purchasing power (which is the inverse of the "price level" e.g. the CPI) is an attempt to measure the value of money against all goods. This can have certain uses, but it can also be highly misleading; it doesn't exist outside the its individual components (which would be the numerous goods money exchanges against). There are many many problems with trying to measure the price level or the general purchasing power of money, but that's a different topic.

Theoretically, the supply and demand graph for money would have the general purchasing power of money on the y-axis and the quantity of money on the x-axis. The supply curve would represent the supply schedule for money and the demand curve would represent the demand schedule. An increase in demand would lead to a higher purchasing power of money (a higher general price for money, a lower price level in the economy). An increase in supply would lead to a a lower purchasing power of money (a lower general price of money, a higher price level for the economy).

Thank you for that very informative and detailed explanation.

You're welcome. Did it make sense and address what you were confused about?
Tidin
Posts: 63
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12/17/2010 5:07:06 AM
Posted: 5 years ago
At 12/16/2010 11:20:20 PM, J.Kenyon wrote:
At 12/16/2010 11:16:23 PM, GeoLaureate8 wrote:
At 12/16/2010 11:05:10 PM, J.Kenyon wrote:
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

Like Ragnar said, it's not nothing in terms of purchasing power.

Yes, but why does it's purchasing power diminish if more fiat currency is printed?

For example: The grocery store is selling a loaf of bread for $3.00. You have $3.00 in your hand and you can purchase that loaf of bread for $3.00. So if the government prints out more money the next day, the bread is still $3.00, your income is still the same, then how has the purchasing power in any way decreased?? The only thing that might happen would be that the grocery store increases the price of bread, but why should it be necessary to increase the price of bread just because more money was printed and put into circulation?

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).

I would like to add that the increase in the price of the bread is not the only possible outcome. For example, the loaf of bread may become smaller. Therefor, your three dollars is now only able to buy 3/4 the size of the original loaf of bread. Inflation doesn't always work in terms of higher prices; quality and quantity are in play as well.
djsherin
Posts: 343
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12/17/2010 2:16:13 PM
Posted: 5 years ago
At 12/17/2010 5:07:06 AM, Tidin wrote:
At 12/16/2010 11:20:20 PM, J.Kenyon wrote:
At 12/16/2010 11:16:23 PM, GeoLaureate8 wrote:
At 12/16/2010 11:05:10 PM, J.Kenyon wrote:
At 12/16/2010 7:52:13 PM, GeoLaureate8 wrote:
At 12/16/2010 7:46:18 PM, Ragnar_Rahl wrote:
Countries are known to go to war if you try the "print moar fiat" solution too often. Also, doing so tells entrepreneurs not to bother because their cash will be inflated to nothing

Yeah, but it already is nothing, so how could it's value decrease if it was never there to begin with?

Like Ragnar said, it's not nothing in terms of purchasing power.

Yes, but why does it's purchasing power diminish if more fiat currency is printed?

For example: The grocery store is selling a loaf of bread for $3.00. You have $3.00 in your hand and you can purchase that loaf of bread for $3.00. So if the government prints out more money the next day, the bread is still $3.00, your income is still the same, then how has the purchasing power in any way decreased?? The only thing that might happen would be that the grocery store increases the price of bread, but why should it be necessary to increase the price of bread just because more money was printed and put into circulation?

Supply and demand. Money is a commodity like any other; if you produce more of it while demand stays the same, the value drops. Obviously, if the government doubles the money supply overnight, it takes time for that money to have an economic effect (and the effects won't be evenly distributed -- the poor and middle class tend to get screwed).

I would like to add that the increase in the price of the bread is not the only possible outcome. For example, the loaf of bread may become smaller. Therefor, your three dollars is now only able to buy 3/4 the size of the original loaf of bread. Inflation doesn't always work in terms of higher prices; quality and quantity are in play as well.

I'd also like to add that inflation doesn't just happen. There isn't some magic force in the economy that senses the money supply has grown by x% and thus prices must rise by x% minus the growth rate for that period. Inflation also doesn't affect all prices equally, nor does it affect all stages of production equally. This is a key insight of the Austrian school. Other schools of thought (in my experience) see inflation as a general phenomenon. They analyze it terms of the price level and the price level only. In reality, the prices of various goods are affected differently (depending on who gets the new money and where they spend it).